By Neil King
StartUp sat down with RAKBANK’s head of personal banking, Ian Hodges, and head of RAKFinance, Ajoy Kane, to learn more about how the bank is helping small business access all-important funding.
SME financing is on the up. Banks’ budgets are growing, marketing campaigns are intensifying, and more and more small businesses are succeeding in their quest for funds.
With banks throughout the UAE making more of an effort to increase their lending and improve relations with start-ups, it’s no surprise to hear RAKBANK’s senior management in confident voice.
“A number of banks look at a potential SME customer and perceive them to be risky,” says Ian Hodges, head of personal banking.
“We don’t. We perceive small and medium businesses to be very important, and also a great opportunity.”
I meet with Hodges and head of RAKFinance, Ajoy Kane, to find out more about SME banking, why start-ups have found it difficult to borrow in the past, and how RAKBANK is trying to improve the odds for new businesses looking for funding.
Established in 2005, the bank’s business finance department – RAKFinance – has grown its reach and popularity over the course of its nine-year existence. And its origins lay in the bank’s identification of a sizable gap which it believed it could fill – namely start-ups.
Hodges explains: “We started this because we recognised that no bank in the country considered start-ups or SMEs right at that beginning. Most banks wanted to see financials, equity, and that kind of thing.
“No small businessman starts with those things available to show. The biggest step for them is quitting their job and starting their own business – it takes time to build up the other aspects.
“We identified an opportunity because people were crying out for this kind of finance. We wanted to help them get finance quickly, because it’s what they needed.”
Kane adds that RAKFinance has grown “massively”, highlighting the fact that while many banks ask for companies to be at least one year old before becoming customers, RAKBANK invited companies as young as six months to apply.
He also pointed out the significant impact of one particularly big decision at the beginning of the global financial crisis in 2008.
“We were the only bank in the region that kept lending during that time, and it really helped us out,” he says.
It was this period which solidified RAKBANK’s position in the SME market, aided by a strong marketing campaign which highlighted it was ‘Open for Business’ while some other banks closed their doors to new ventures.
Discussing the bank’s reason for keeping its doors wide open, Hodges says: “If you’re a trading business, and the UAE is a trading country, even during a financial crisis people are going to continue trading. People still needed support to be able to do that.
“There are families that have traded here for decades and longer. The country didn’t stop – the world didn’t stop. Trading requirements carried on.
“It wasn’t so much a confidence that crisis was going to go away, but it was identifying customers that had to continue to trade. There was as much in it for them as us. More, even. They had invested heavily in their business. If your small business sinks then you lose everything. We can afford to absorb that loss, but for the individual it’s far more serious.
“During the crisis we didn’t change lending policies – we looked for customers who had a good business model. That’s what we needed to see.”
A solid business model is one of the main ways a bank can mitigate risk in any loan deal – something RAKBANK has stuck to as a main indicator as to whether a business is safe enough to lend to or not.
But as Kane explains, there are other things the bank looks for, all of which add up to paint a picture of the business and how safe it is to enter into an agreement with.
“There are certain things we need to know,” he says.
“How long they’ve been in business, the industry they’re in, and so on. Basic things to help build a profile.
“We do come across companies who need money, then we look at the business and it’s evident that it doesn’t make business sense. Their model doesn’t make them profitable enough.
“All we do is try to understand the business model. That’s what we’ve very good at. We meet up with them, go through the model, and take things forward accordingly.
“We don’t go into financials – just the business side of things. That’s how we can see if the business is risky or not.”
Hodges adds that no matter how much risk is involved on the bank’s side, it will always be higher for the business owner.
“We recognise these business owners to be hard working individuals who want to keep their business going, and growing, and will want to pay us back,” he says.
“Their stake in it is far greater than ours.
“We can do it without security, without cash. As long as when we look at the business we can see that it will generate sufficient finances to make repayments, then we can do it.
“If you’ve got a business that’s traded through a cycle – a year or two – and making more cash than it’s paying out, then it’s almost certainly an opportunity to lend.
“We’re looking at customers, and risk, from a different point of view.”
What becomes apparent is that RAKBANK is employing a much more personal approach than is traditionally associated with banks.
“Every company has a different model, and we understand that,” affirms Kane.
“That’s why we work on a case-by-case basis and don’t have set rules, as such. We’re in touch with them every step of the way. If they’re not ready for a loan then we explain why and suggest ways they can become ready.
“Then, if they do get the loan, that’s not the end – it’s the beginning of, hopefully, a long relationship.”
It’s a method that clearly works, with customers often returning for more funding. In fact, Kane explains that one in three loans issued is a top-up loan – proof that RAKBANK’s approach generates loyalty among customers.
Hodges adds: “These are growing businesses, and as they grow the loans change and the process changes, and therefore the relationship changes.
“At the point where a customer does have audited financials, balances sheets, security, and so on, then we move them into our SME business. Which is growing very, very well.”
A big part of the bank’s SME offering is the assistance it offers regarding trade finance products.
Whether a business needs to use them or not, RAKFinance representatives explain and discuss RAKTrade with customers at the very beginning of their relationship.
Kane says: “A lot of customers don’t know what the bank offers, so it’s important for us to let them know, so they’re informed about their options.
“We try to make things easier in different ways. We have a wide array of trade finance products for SMEs – everything that they will need. A lot of SME require it and it take s a bit of pressure off them. It’s always available to them should they want to take it up.”
Another, more recent, offering is the bank’s Islamic finance unit, Amal, launched at the beginning of 2013. Established with a reported issued capital of $27.2m, Hodges explains Amal has a “mirror offering” with the same set of conventional and Islamic products available to customers.
He adds: “About 20 percent of business we do is Islamic. It’s growing in line with what we had hoped, and over time more and more customers will take advantage of it.”
When quizzed about what businesses can do to improve their chances of acquiring funds, whether conventional or Islamic, Kane emphasizes that the bank does not have “specific rules,” and that they “look at everything that comes to us on its own merits”.
However, Hodges offers a few suggestions to help them prepare themselves for a meeting with the bank.
“There are a few key things you can do,” he says. “Firstly, open a bank account. If you’re operating in cash, it’s difficult for the bank to know what’s going on, and it might be harder for you to get a loan.
“If you have an account, we can easily see what’s going on with your business and it just makes the process a lot easier.
“Even if you have a bad day and your account goes to zero, that’s fine – that’s part of starting a business and we know that. If you have six months of statements then we can see how AED1 has turned into AED1.5. It gives us hard info to work with.
“Secondly, have a clear idea of what you would do with the money. We can then help you more easily that way. With our experience we might be able to see that what you have planned isn’t the best thing for you do with your money.
“We can advise and help you with what you need at the particular stage you’re at.
“If you need the money for a single deal, talk us through the deal – help us understand your plans and let us try to help you.
“Also, it helps us if you are able to show us regular customers and regular orders. We are much more interested in what we think will happen in the future than what has happened in the past. If you can show us a clear idea of your business and can show us how it will help you repay the loan, then it gives you a really good starting point.
“Finally, when you set your company up, get the documentation right.
“So many times we want to lend to a company but their documentation hasn’t been done right. We go back to them and tell them they need to change this and change that, and then we can loan.
“You’re then spending your hard-earned money to change things you did only six months ago. Even if you’re never going to borrow, it’s worth doing.”
While this advice is sure to improve many start-ups’ chances of securing lending from banks, it comes at a time when relationships between SMEs and financial institutions are often fragile.
Statistics by Dubai Chamber show that only four percent of loans are issued to SMEs, a figure that the Chamber and the emirate’s banks have committed to improving, but one which has led to a degree of grievance among business owners.
While Hodges understands their frustrations, he believes things have changed dramatically in a short space of time.
He says: “If somebody has been turned down for a loan for whatever reason, I think that’s going to hurt and you will remember that for a long time. But I don’t think it’s the case that this should happen now.
“The SME sector is one of the strongest parts of the country commercially. Every bank is trying to work with SMEs in slightly different ways, and targeting different segments, but whatever the approach, SMEs are something that banks clearly value and want to support.
“Maybe it’s taken time for banks to realise the value, but I think most are trying hard to make their lending accessible.”
Of course, banks aren’t the only source of finance available to entrepreneurs and small business owners.
Investors, venture capitalists, crowdfunding companies, and other groups and individuals have become more and more active, offering a variety of different options to businesses needing funds.
However, Hodges believes banks offer something other financiers can’t – control.
“If you’re looking for financing the bank is one of the best places to go,” he says. “We lend you money, you pay us back the money, and hopefully at the end of that you have the same business but bigger. And it’s all yours. Unlike if you go to investors.
“There is clearly a time within the growth of a business when equity investors and private investors are the best way to go, but for our target customers we believe it’s much more important to have your own company at the end of it.
“We don’t want a slice of your profit. We signed a contract and got back what we lent and that’s it. You know where you stand.”
As our meeting draws to a close, Hodges adds an important message to those who have been denied a loan in the past – asserting that it is in everybody’s interest for the funding to be secured, and that small businesses should take positives out of a failed application.
He says: “People have to remember that a bank saying no isn’t ‘we will never lend you money’. A bank saying no could be the best thing that ever happened to you.
“If we don’t lend you money it’s because we don’t think you will be able to pay it back. But we we’ll try to say that if you can do this, this and this, then you’ll be in a better position. So come back to us in three months and we’ll talk again.
“It’s important for small businesses to understand that we want to lend money because that’s how we make money. So we’ll do what we can to help you get that money, even if it means saying no first time round.”